Newspaper article THE JOURNAL RECORD

Convertible Bonds Good Means for Investment Flexibility

Newspaper article THE JOURNAL RECORD

Convertible Bonds Good Means for Investment Flexibility

Article excerpt

Many people want investment flexibility in today's upredictable, fast-moving environment. They feel it's important to be able to shift quickly and easily from one investment vehicle to another - say, from stocks to bonds or vice-versa - as the economy or their personal circumstances change. One of the best vehicles for achieving flexibility is the convertible bond.

A convertible bond is precisely what its name suggests, that is, a debt obligation that can be converted into a specific number of shares of common stock of the issuing corporation. In their earlydays convertibles were issued primarily by companies with poor credit ratings that used a stock "sweetner" to lower their interest cost. Since then, however, convertibles have become readily accepted and are now issued by many of America's blue-chip corporations.

Convertibles are attractive because, as bonds, they pay interest and, as quasi-stocks, they offer the potential for capital appreciation. This appreciation occurs because an increase in the price of the company's common stock usually translates into an increase in the price of the convertible bond.

Bondholders can realize capital gains in two ways: by converting the bonds into stock if the bond price rises enough to make this profitable; or, if the price has risen but not enough to justify conversion, by selling the appreciated bonds to others who except further price increases in the stock and hence the bond.

The capacity to earn money two ways - interest and capital growth - does not come free, of course. In return for the potential for capital growth, convertible bonds usually yield two to four percentage points less than equivalent nonconvertible, or straight, bonds.

Another trade-off has to do with stability and safety of principal. Convertibles offer a reasonable degree of safety; more than you get with the common stock of the same company but less than you get with its straight bonds. Convertible prices are more volatile than straight bond prices because of the convertibles' linkage to the vagaries of the stock market.

Thus, if the common stock declines rapidly, the bond's price could also sink fast. …

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